Does Asahi Intecc (TSE:7747) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Asahi Intecc Co., Ltd. (TSE:7747) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asahi Intecc

What Is Asahi Intecc's Debt?

The image below, which you can click on for greater detail, shows that Asahi Intecc had debt of JP¥7.69b at the end of December 2023, a reduction from JP¥13.7b over a year. However, it does have JP¥32.5b in cash offsetting this, leading to net cash of JP¥24.8b.

How Strong Is Asahi Intecc's Balance Sheet?

The latest balance sheet data shows that Asahi Intecc had liabilities of JP¥22.0b due within a year, and liabilities of JP¥8.35b falling due after that. Offsetting these obligations, it had cash of JP¥32.5b as well as receivables valued at JP¥19.3b due within 12 months. So it actually has JP¥21.5b more liquid assets than total liabilities.

This surplus suggests that Asahi Intecc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Asahi Intecc boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Asahi Intecc grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Asahi Intecc can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Asahi Intecc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Asahi Intecc's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Asahi Intecc has JP¥24.8b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So is Asahi Intecc's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Asahi Intecc's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.